Here’s Why Silver Could be Setting Up for a Strong Q4

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Precious metals bulls hoping for a stronger second half of the year have not been rewarded yet, with silver (SLV) sliding more than 16% in Q3, falling deeper into negative territory year-to-date. This horrid Q3 performance followed a sharp reversal and 6% drop in June, and it’s now up to the bulls to play strong defense as we Q4.

The good news for investors is that silver seasonality is very strong in Q4, often finding a low in late Q3 or early Q4 and rallying into year-end. The other good news is that silver is the most hated it’s been in years, and when the scales are tipped too far in one direction for pessimism, we typically see snapback rallies. Let’s take a closer look below:

Chart, line chart Description automatically generated

(Source: EquityClock.com)

Beginning with seasonality, we can see that silver followed its typical seasonality traits quite well to start the year, with a near parabolic rally out of the gate in January, though, it peaked earlier than expected in February vs. March typically. Silver then peaked again in Q2, which is typical of the metal, before wading through its seasonally weakest period: May to July. Unfortunately, the June softness persisted into Q3, which has caught several investors off guard.

The silver lining, though, is that silver is now less than a week away from a period where it often makes it H2 low, with this low typically arriving in the 2nd week of October. If December 2021 is anything like December 2020, then the bulls should have a strong relief rally ahead, with silver up 15% last December and 12% in Q4. Obviously, there’s no guarantee that silver follows its seasonality traits. Still, the expected seasonal low is also arriving at the same time as a sentiment buy signal, placing more weight on a potential bottom.

Chart Description automatically generated with low confidence

(Source: Daily Sentiment Index Data, Author’s Chart)

Moving over to sentiment, we can see that bullish sentiment is sitting at its lowest levels in years, with silver registering a reading of just 9% bulls last week. This suggests that there were nine bears for every one bull in the market last week, which would indicate extreme pessimism after what’s been a painful 8-month correction. In fact, this was the lowest reading for bullish sentiment we’ve seen for silver since its March 2020 low, and prior to that, the September 2018 cyclical bottom.

In previous instances when sentiment has been this bearish, we have seen positive 2-month, 4-month and 6-month forward returns, with average 6-month forward returns of 10% or higher over the past decade. This would suggest that silver could easily return to the ~$25.00/oz level by March of next year, which would line up with…

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